Chesapeake files for bankruptcy protection

Chesapeake Energy, the one-time high-flying natural gas producer that thrust US shale development onto a world stage, filed for Chapter 11 bankruptcy protection today as collapsing energy prices challenged the company's ability to carry its more-than $9bn in debt.

The company will eliminate about $7bn in debt under the bankruptcy plan and has secured $925mn in debtor-in-possession financing. The company will continue to operate through the process.

Oklahoma City-based Chesapeake was an early champion of using horizontal drilling and hydraulic fracturing to coax natural gas from shale rock formations. Led by its outspoken co-founder and chief executive, the late Aubrey McClendon, it developed one of the largest portfolios of US shale assets, became the biggest producer of US natural gas by volume and lured billions of dollars in investment into the shale industry. The company also advocated for more gas use in the power and transportation sectors and was a booster of US gas exports.

Chesapeake issued billions of dollars in debt to amass huge acreage positions in places such as the Marcellus shale gas field in Pennsylvania and the surrounding states, the Haynesville shale of east Texas and northern Louisiana and throughout its home state of Oklahoma. At its height the company deployed thousands of landmen to far-flung oil and gas fields, often paying top dollar for leases. Chesapeake in 2012 had more than $16bn in debt, but worked it down to $9bn in May, when it told investors that low oil and gas prices may force it to default on its loans.

The company last year produced about 2.3 Bcf/d (65mn m³/d), making it the sixth largest US producer by volume. Prices for gas, which still represents the bulk of Chesapeake's output tumbled below $2/mmBtu on a mild winter and robust supplies. Oil prices hit unprecedented lows in April as the global economic slowdown from the Covid-19 pandemic crimped demand for transportation fuels.

Leading the charge into shale

Chesapeake and other so-called independent oil and gas producers sought out new fields armed with easy access to capital and a simple pitch: The US, through the development of shale formations, could unlock energy independence and wean itself from foreign oil. The rapid growth of US shale output and Chesapeake's success at developing those fields caught the attention of companies across the world.

Chesapeake entered into multi-billion dollar joint-venture agreements with major international oil and gas companies, such as Statoil of Norway, French oil major Total and the Chinese state-controlled oil company CNOOC. The deals usually involved exchanging shale acreage for cash and capital to defray drilling costs.

The company's success at this strategy also created the circumstances for its fall. The US in 2011 surpassed Russia to become the world's top gas producer, but the deluge of domestic gas pushed prices lower and made the going tougher for producers that had hitched their future to higher prices.

Turn to crude

Chesapeake attempted to pivot, shifting away from gas production and focusing on higher-value NGLs and oil. The company in 2010 set its sights on becoming one of the biggest producers of liquids in the US. At an energy conference in 2011 McClendon said that the US could become the biggest producer of oil as it continued to tap unconventional crude deposits.

"We are already No. 3, and I think there's an excellent chance by 2020 to return to being the No. 1 oil producer in the world," McClendon said at the Jefferies Global Energy Conference in Houston. "We held that title for 75 years."

The US reached that milestone in 2018, two years ahead of that schedule.

Chesapeake by 2012 had been stung by a low natural gas prices. Its cost to acquire, retain and begin developing properties far outpaced its cash flow. Much of the company's cost strain stemmed from being forced to drill wells to satisfy lease terms.

Chesapeake sold off assets and took out high interest lows. McClendon in early 2013 stepped down following differences with the board. He was replaced by Doug Lawler, a former Anadarko Petroleum executive, in May 2013. Lawler put a stop to McClendon's strategy of endless acquisitions, began selling assets, cutting costs and funding only wells that will generate high returns on investment.

Chesapeake in May said it did not expect to meet its financial covenants starting the in the 2020 fourth quarter. On 19 June the company said it chose not to make an interest payment on outstanding debts, setting the stage for the bankruptcy filing in the Southern District of Texas.

US shale industry asset impairments may top $300bn, raising the prospect of an acceleration in bankruptcies, consultancy Deloitte said in a 22 June report.

By Jason Womack